Wednesday, June 18, 2014

Bill in Budget session to amend Forward Contract Regulation Act

Amendments to give more teeth to regulator, introduce new products. The Finance Ministry is considering tabling amendments to the Forward Contract Regulation Act, 1952, in the next session of Parliament, slated to be held in the second week of July.

The amendments seek to not just give more power to the commodity market regulator, the Forward Market Commission (FMC), but also pave the way for introduction of new products, such as options, in the market. There is also a move to allow banks and foreign institutional investors (FIIs) to take part in the commodity markets.

However, this will require an amendment in the Banking Regulation Act and the SEBI Act.

The Bill for amendments was tabled during the 15{+t}{+h} Lok Sabha, but could not get passed even after the Standing Committee submitted its report. The Bill lapsed with the dissolution of the House.

With the new Government, led by Narendra Modi, already kicking off the process to introduce the Bill in Parliament, it is clear that at least for the time being FMC will not be merged with SEBI.

Last week, Finance Secretary Arvind Mayaram had said, “We are hopeful that very soon we should have a new statute in place which will provide greater regulatory authority to FMC.”

An autonomous independent regulator is absolutely critical to providing strength and depth to the commodities market, he added.

The new Bill is also likely to include suggestions given by the DS Kolamkar Committee, mainly on facilitating frictionless arbitrage between the spot and futures market, which is key to fulfilling the objectives of price discovery and hedging.

The committee was set up in wake of the ₹5,600 crore NSEL scam, following which the commodity market and FMC were transferred to the Finance Ministry from the Consumer Affairs Ministry in September 2013.

The committee focussed on reduction of trading costs and suggested that one way to reduce the capital cost for a commodities trader was to make banks and other financial institutions an integral part of trading. It also suggested that foreign financial firms (intermediaries and end-users) should be permitted to participate in commodity futures trading.

The existing system of limits on open interest and risk management provides adequate safeguards against the risk of allowing foreign participation in Indian markets, it said.

The committee also recommended that the Government exempt arbitrageurs from restrictions on holding inventory under the Essential Commodities Act, 1955.

To assist the development of organisational capability of firms operating in the commodity futures ecosystem, the Government should stop the suspension of trading in an abrupt and unreasoned manner, it suggested.